Note on Funds Flow Statement

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Statement of Changes in Financial Position

Statement of changes in financial position refers to the statement which is prepared on the basis of all financial resources like capital, assets, and liabilities. This statement measures the changes that have taken place between two balance sheet dates in the financial position of a concern. The changes in the financial position may occur while dealing with following transactions:

Involvement between current assets and non-current assets (fixed or permanent assets).

Involvement between current liabilities and non-current liabilities.

Involvement between current assets and non-current liabilities (long-term liabilities and capital).

Involvement between current liabilities and non current assets.

In simple words, this statement summarizes all the sources from which the funds have been obtained and the uses to which and where they have been applied. The changes in the financial position could be related to several different concepts of funds. The 2 major usages are Working capital funds i.e. Working capital basis (Funds Flow Statement) and Cash funding i.e. Cash basis (Cash Flow Statement).

Funds Flow Statement

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Funds flow statement is the statement that shows the various sources from where the funds have been collected, within a certain time period along with their uses during that period.In simple words, funds flow statement explains about the various sources and application of funds. Thus, funds flow statement is an important tool for financial analysis as it presents a firm with the information on the inflow and outflow of funds of the firm during a financial year.

According to R. N. Anthony," The funds flow statement describes the sources from which additional funds were derived and the uses to which these funds were put."

Objectives and Importance of Funds Flow Statement

To analyze financial position: Funds flow statement helps a firm in analyzing its financial position by providing the firm with analytical knowledge regarding the business financial position. An analytical knowledge is a very helpful tool to the financial manager for planning and decision making.

To help in planning and controlling:Funds flow statement helps in estimating the required amount of fund needed for the enterprise to run a certain project, which in turn helps in controlling the funds and plan more thoroughly for future.

To help in allocation of resources:Providing information on the inflow and outflow of funds is the main objective of funds flow statement. While doing that, it also shows current availability of those sources and where they come from. This helps in realizing the available funds for the long term and short term projects.

To evaluate financial performance:Funds flow statement showsthe weaknesses and strengths of a firm. By doing so, it becomes easy to analyze how well the management has been running the funds and determine its financial performance.

To explain the changes in financial position:Between two balance sheets, there is definitely bound to be some changes and the main motive of funds flow statement is to disclose those changes and their causes. Thus, this statement helps in explaining the changes in financial position of the firm.

Procedures of preparing Funds Flow Statement

STEP 1: Preparation of Statement of Changes in Working Capital

Working capital is the difference between current assets and current liabilities. Current assets are those assets which are convertible into cash without any negative effect on their value, within a year or a short time period. Some examples of current assets are bank balance, debtors, inventories/ stock, accrued income, bills receivable, etc. On the other hand, current liabilities are the outsiders’ obligation which must be paid within a short notice like bills payable, bank overdraft, short term loan, creditors, etc.

Rules:

Identify Current assets and Current Liabilities from the Balance sheet.

Using the followings, determine increase or decrease in Working capital.

Conditions

Result

Relationship

CA increase

CA decrease

CL increase

CL decrease

WC increase

WC decrease

WC decrease

WC increase

Direct relationship

Direct relationship

Inverse relationship

Inverse relationship

The format of Statement of Changes in Working capital is shown below:

Alternatively,

Note: Provision for taxation and proposed dividend are regarded as current liabilities if additional information is not given.